making sense of numbers to understand people and why-how we buy

07 January 2009

options in media buying - is it possible?

(I have just been reading a lot of Seth Godin's blogs - and as always, I am getting inspired by his entries. I have a tendency to have these "writing bursts" - and "inspiration bursts" [a fact that my team and extended team in the office know... writing a presentation at 4am and rejigging the whole presentation 3 days before the big deadline because of an idea from a totally unrelated magazine?]. So, to Mr. Godin, thanks for the inspiration!)

Why don't airlines experiment with auctioning of seats, baseball
card style? You could buy the rights to a seat for $200 (speculating,
if you like) and then try to sell it off as the flight time get
closer--it's not hard to imagine an easy to use website for these
transactions. The seat might change hands a dozen times, earning the
airline a processing fee each time, and enriching those that want to
start trading this expiring commodity.

I have not mastered the art of options-trading - but I think his idea is interesting, really. And I think it is applicable to media buying, particularly for heavy-, fixed-inventory based media (i.e., TV, radio, presses, magazines, outdoor).

In the Philippines - back in 1995 when I was just starting - there were these things called "hot properties" on TV. They were usually the top-rated programs. And also the most expensive - and the most in-demand airtime. Of course, there was a limit: every hour, only 10 minutes of advertising space (I think - it's been too long ago) are available.

So what did the big agencies do? They incorporated in the contracts a clause that says "we are buying 1-30s slot in this time-band for every single day of the year, 365 days". There were no "special fees" because it was highly-demanded timeslot.

However, looking back now - and having had some initial exposures to the art and science of options trading and having seen how ratings have become volatile, this approach would no longer work. Other time bands have grown in ratings. The dominant station no longer is dominant - fragmentation has emerged.

The way to go now? Adopt options trading styles in the pricing system.

Given the risk, advertisers should no longer commit to buy airtime for one year at similar costs (or minimal discounts). Instead, advertisers should buy the option to buy a spot at a certain time - and as an option, they can either exercise it or not. They should then put those "options-contracts" in a market - where other advertisers and agencies could buy/sell on that option.

Will it work? I am not sure. It will take some guts to do something like this - and some understanding of probability and statistics and risk. And media buying in this part of the world has devolved into 'deals and deals and more deals'.

But imagine the potential additional revenues from trading these options-contracts in an options-marketplace?

A new revenue model for media companies!

(As for me: I am sill trying to master options - and understand the deltas and the gammas and the elements of the Black-Scholes-Merton model. So I am not sure if this is possible. But from my initial readings, why not?)

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